Stericycle, Inc. (NASDAQ:SRCL) Q3 2023 Earnings Call Transcript

Stericycle, Inc. (NASDAQ:SRCL) Q3 2023 Earnings Call Transcript November 2, 2023

Stericycle, Inc. reports earnings inline with expectations. Reported EPS is $0.43 EPS, expectations were $0.43.

Operator: Good day and thank you for standing by. Welcome to the Q3 2023 Stericycle Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. And I would now like to hand the conference over to your speaker today, Mr. Andrew Ellis. Sir, please go ahead.

Andrew Ellis: Good morning, and thank you for joining Stericycle’s 2023 third quarter earnings call. On the call today will be Cindy Miller, our Chief Executive Officer; Janet Zelenka, our Chief Financial Officer and Chief Information Officer; and Cory White, our Chief Commercial Officer. The discussion today includes forward-looking statements that involve risks and uncertainties. When we use words such as believes, expects, anticipates, estimates, may, plan, will, goal or similar expressions, we are making forward-looking statements. Forward-looking statements are prospective in nature and are not based on historical facts, but rather on current expectations and projections of our management about future events and are, therefore, subject to risks and uncertainties.

Our actual results could differ significantly from those described in such forward-looking statements. Factors that could cause our actual results to differ are discussed in the safe harbor statement in our earnings press release and in greater detail within the risk factors in our filings with the U.S. Securities and Exchange Commission. Our past financial performance should not be considered a reliable indicator of our future performance, and investors should not use historical results to anticipate future results or trends. We disclaim any obligation to update or revise any forward-looking statements other than in accordance with legal and regulatory obligations. On the call, we will discuss non-GAAP financial measures. For additional information and reconciliation to the most comparable U.S. GAAP measures, please refer to the schedules in our earnings press release, which can be found on Stericycle’s Investor Relations website at investors.stericycle.com.

The prepared comments for today’s call correspond to an earnings presentation, which is also available at Stericycle’s Investor Relations website. Throughout the call, we will reference specific slides from the presentation. This call is being recorded, and a replay will be available approximately one hour after the end of the conference call today until November 30th, 2023. A replay of the webcast will be available on Stericycle’s Investor Relations website. Time-sensitive information provided during today’s call which is occurring on November 2nd, 2023, may no longer be accurate at the time of a replay. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Stericycle is prohibited.

I’ll now turn the call over to Cindy.

Cindy Miller: Thank you, Andrew. Good morning, everyone, and welcome to today’s call. I’m pleased to share that in the third quarter, through the hard work and dedication of our team members and technology partners we successfully deployed the ERP system to our U.S. Regulated Waste and Compliance Services business. Today, almost all of our U.S. team members are leveraging the new technology. I’d like to take a few minutes to update you on the ERP deployment. I’m proud to say that we grew North America Regulated Waste and Compliance Services organic revenues by 3.9% in the third quarter in the midst of a major ERP deployment. To give you greater insights into the deployment, I’ll speak to the operations portion, and then I’ll turn the call over to Cory, to provide an update, from a customer experience perspective and how it has improved some of our commercial processes.

We continued to prepare for this deployment throughout the quarter, as we finalize data conversion, training and facility upgrades. We launched the deployment in early September when we began servicing our customers through the new technology. From an operational perspective, we couldn’t be more pleased with our team members’ ability to continue to serve our customers since the system deployed. We experienced the typical start-up learning curve that comes when process is changed and are infused with new technology. For our frontline workers, this resulted in an anticipated and temporary reduction in productivity. As the team has become more familiar with the changes in processes and procedures, we are seeing continued improvements and we expect that this new technology will contribute significantly to our ability to achieve the margin expansion embedded in our long-term outlook.

I’ll now turn the call over to Cory, who has been deeply engaged in helping our U.S. regulated waste and compliance services customers transition on to the new ERP. It will provide insights from our customers.

Cory White: Cindy, thank you for the opportunity on today’s call to share our customers’ experience throughout the ERP journey and highlight some of the exciting ways this new technology will help us improve commercial execution. Overall, the rollout of the ERP was a success. We have had no significant system issues. Orders are being created, stops are being routed, container’s are being tracked Waste is being picked up, treated and properly disposed and invoices are being created and processed for both regulated waste and compliance services and secure information destruction customers. Along this journey, we have been in frequent contact with our customers, and they are not reporting any major disruptions. We track customer satisfaction trends weekly across our customer base.

During the first couple of weeks of September, our customer satisfaction scores understandably dropped as some of our customers experienced short-term disruption. Our scores have since improved and are already above pre-go-live levels. Following the deployment for the first time, we now have real-time capability to see order completion in the system. We are pleased that an overwhelming majority of orders are serviced seamlessly. We have seen an expected increase in our customer call center volume. Importantly, the majority of this increase is from customers requesting assistance, understanding the new invoice format, enrolling in the customer portal, setting up AutoPay or verifying new account numbers. We view these interactions as a favorable sign of our customers’ engagement with and adoption of the new platform and how smoothly the ERP deployment has gone for the vast majority of our customers.

I’d now like to highlight a few ways in which we have modernized and improved the customer experience through the ERP deployment. One, we’ve added important digital enhancements, including redesigned portals that act as a one-stop shop for customers to view account information receive consolidated billing for services and sites and pay for their services. Two, for our compliance services customers, we integrated the portal with our compliance training platform to create a single solution to meet their needs. Three, customers now receive automated advanced service notifications to help them better plan their days, a feature requested by our customers so they know when they will be serviced. Four, we also made enhancements to our secure chain of custody and can now track waste at the container level through the entire service life cycle in real-time.

Five, in the near future, we expect that our portal will provide new and enhanced reporting features that will allow customers to easily access weight and volume metrics benchmark and optimize waste streams and gain greater insights, which can be used in pursuit of their sustainability goals. Over the past few months, I’ve met personally with well over 100 customers during face-to-face meetings as well as lunch and learn events to elicit their feedback, which has been overwhelmingly positive. They have been supportive of our move to new systems and are clearly excited about how our new capabilities will unlock opportunities to better service them. Recently, one of our key customers told me how pleased they were with the deployment. They appreciated the proactive communication on changes we made to their account and like the enhancements we made to the portal.

They also said they did not get any negative feedback from their internal stakeholders. They saw this as a sign of a successful deployment citing that silence is Golden for managing these kinds of major changes. I’d like to take a moment now to talk about how our commercial organization is using the technology to become more nimble and efficient. All of our salespeople in the U.S. are now utilizing the new system for five key processes lead development, pipeline management, performance management, reporting and contracting. This is a major step forward on our quality of revenue journey and our ability to execute on key business priorities, which includes expanding service penetration, improving customer implementation velocity and deepening our customer partnerships by developing enhanced customer solutions.

By operating on a common platform, we are improving our proficiency and selling effectiveness for both the regulated waste and Secure Information Destruction businesses while driving greater consistency and accountability throughout the sales process. The platform also lays the foundation for future enhancements like digital and guided selling capabilities and additional call center automation. Finally, by unlocking data and related insights, we expect this will lead to more intelligent sales decisions, new product development, and service enhancement opportunities as we continue to listen to the voice of our customers. I’ll now turn the call back to you, Cindy.

Cindy Miller: Thank you for that update, Cory. Turning to our third quarter results. I’m pleased to report that in the third quarter, Regulated Waste and Compliance Services continued its organic growth trend, increasing 4.1% globally even during a period of ERP deployment. Growth this quarter has primarily come from our pricing levers. This has been partially offset by challenges in national accounts, which includes customers like retail pharmacies and nationwide health care service providers. These customers have remained very sticky despite the economic headwinds they are facing. As our customers reduce their footprint our service stops in this channel have also contracted. We remain encouraged that the critical services we provide remain a priority for these customers.

Secure Information Destruction organic revenue declined 11.6% mainly due to lower commodity index revenues, including lower review rates impacting sorted office paper and lower fuel and environmental surcharge. Although this revenue channel was down year-over-year, The third quarter of 2022 had significant organic revenue growth of 32.3% on the strength of commodity-related pricing. When considering Secure Information Destructions organic growth over a two-year compound annual growth rate, it grew organic revenues 7.5% since 2021. Similar to regulated waste, our National Secure Information Destruction customers are experiencing a reset in their post-COVID pandemic office footprint. Across the Secure Information Destruction business, we believe we remain an essential service and are retaining these customer relationships, but have seen service stops decline year-over-year by about 4%, mainly driven by customer site closures and reduced service frequencies.

In the long run, we believe Secure Information Destruction will contribute to our long-term growth trajectory by leveraging technology deeper customer insights and new service offerings. Regarding our operational efficiency, modernization and innovation priority, most of our engineering team members were squarely focused on deploying the ERP and executing our facility modernization plan. During the deployment, our engineering team supported all aspects of field operations, such as training, communication, site visits to ensure technology was working as designed and identifying and driving performance opportunities. Additionally, construction of our incinerator in McCarran, Nevada remains on track, and we continue to expect the construction phase of the project to be completed in the first half of 2024.

As mentioned during our second quarter earnings call, we completed 2 divestitures in the third quarter with the sale of our dental recycling business in the Netherlands, which closed in July and the sale of our Secure Information Destruction joint venture in the United Arab Emirates, which closed in August. In early October, we also divested our regulated waste business in Romania our 19th divestiture since 2019. In October, we substantially completed a targeted workforce reduction that we expect will generate annual savings of approximately $8 million and resulted in an approximate $3 million charge. As we look to drive long-term margin expansion and shareholder value, we have a host of levers available. These levers are further enabled by our investments in our ERP technology and infrastructure and include strategic initiatives, careful hiring, attrition, and targeted workforce reductions to align our operating model with the performance of our business.

I will now turn the call over to Janet to discuss our third quarter financial results in more detail.

Janet Zelenka: Thank you, Cindy. I will start by summarizing our third quarter financial results. As noted on Slide 5, revenues in the third quarter were $653.5 million compared to $690.3 million in the third quarter of 2022. The decrease was mainly due to divestitures of $32.4 million, which was partially offset by favorable foreign exchange rates of $6.1 million. Organic revenues in Regulated Waste and Compliance Services grew $17.4 million, while Secure Information Destruction organic revenues declined $27.9 million. Secure information destruction was mainly impacted by lower commodity index revenues of $30.1 million, including lower RISI rates and packing sorted office paper and lower fuel and environmental surcharges. As noted on Slide 6, Regulated Waste and Compliance Services revenues were $439.9 million compared to $447.8 million in the third quarter of 2022.

Excluding the impact of divestitures and foreign exchange rates, organic revenues increased 4.1% in the third quarter. In North America, Regulated Waste and Compliance Services organic revenues increased $13.9 million or 3.9% during the quarter of the ERP deployment, mainly driven by our pricing actions. International Regulated Waste and Compliance Services organic revenues increased $3.4 million or 5.4%, mainly driven by our pricing levers, partially offset by lower waste volumes compared to the third quarter of 2022. International waste volumes continue to be impacted by health care staffing shortages and interment strikes. Secure Information Destruction revenues were $213.6 million compared to $242.5 million in the third quarter of 2022.

Excluding the impact of foreign exchange rates, organic revenues decreased 11.6%, mainly due to lower commodity index revenues, reflecting more than a $100 reduction in sorted office paper pricing per ton year-over-year. In North America, Secure Information Destruction organic revenues declined $25.5 million or 11.9% compared to the third quarter of 2022. In the third quarter, recycling paper revenues were down approximately 7.6% or $16.3 million due to lower RISI rates affecting sorted office paper pricing and lower tonnage. In the quarter, service revenue was down approximately 4.3% or $9.2 million, mainly driven by lower fuel and environmental surcharges and lower service stops, as Cindy mentioned. Excluding these surcharges, service revenue was up $2 million.

Approximately one-third of the lower sorted office paper recycling revenue was offset by our recycling recovery surcharge reflected in service revenue. Under more normal RISI rate circumstances, when sorted office paper prices are below $192 a ton, we are able to offset approximately 60% of the reduction in paper prices. Given that the year-over-year decline in paper prices was over $100 a ton, we were able to offset approximately one-third of the lower SOP recycling revenue through our recycling recovery surcharge reflected in service revenue in the third quarter. This is due to the nature of the index for this surcharge and we expect it to offset about 30% of the volatility when comparing to last year for the rest of 2023. Our International Secure Information Destruction organic revenues decreased $2.3 million or 9.2% compared to the third quarter of 2022, mainly due to lower recycling revenues and fuel and environmental surcharges.

Income from operations in the third quarter was $24.2 million compared to $50.6 million in the third quarter of 2022. The $26.4 million decrease was mainly due to lower commodity index revenues and a corresponding margin flow-through impact of $22.2 million. The decrease was also due to anticipated higher incentive and stock-based compensation of $7.2 million and a self-insurance settlement of $2.2 million. These were partially offset by cost savings of $8.6 million and lower bad debt expense of $3.2 million. Net income was $2 million or $0.02 diluted earnings per share compared to $28 million or $0.30 diluted earnings per share in the third quarter of 2022. The $26 million decrease was mainly due to lower income from operations of $26.4 million, as I just explained.

Cash flow from operations for the nine months ended September 30th, 2023 was $193.3 million compared to $43.1 million in the same period in 2022. The year-over-year increase of $150.2 million was mainly driven by lower FCPA settlement payments of $72.8 million, improved accounts receivable collections net of deferred revenues of $55 million, and lower annual incentive compensation payments of $22.3 million. Adjusted income from operations was $70.3 million or 10.8% as a percentage of revenues, down from $92 million or 13.3% as a percentage of revenues in the third quarter of 2022. Adjusted income from operations decreased 250 basis points as a percentage of revenues due to the following; lower sorted office paper and fuel and environmental surcharges and their corresponding margin flow-through impact of 340 basis points, higher incentive and stock-based compensation of 110 basis points and a self-insurance settlement of 30 basis points.

These were partially offset by cost savings and margin flow-through of 150 basis points and lower bad debt expense of 50 basis points. As noted on slide 8, adjusted diluted earnings per share was $0.43 compared to $0.65 in the third quarter of 2022. Excluding the impact from divestitures and foreign exchange rates of $0.02 the remaining $0.20 year-over-year decline was driven by lower commodity index revenues of $0.19, higher incentive and stock-based compensation of $0.06 on higher taxes, interest and other of $0.03 and a self-insurance settlement of $0.02. These were partially offset by cost savings and margin flow-through of $0.07 and lower bad debt expense of $0.03. Capital expenditures for the nine months ended September 30, 2023, were $102.2 million compared to $106 million for the same period last year.

Free cash flow for the nine months ended September 30, 2023, was an inflow of $91.1 million compared to an outflow of $62.9 million in the same period of 2022. As noted on slide 9, the year-over-year improvement of $154 million is mainly due to a higher cash flow from operations of $150.2 million. DSO was reported for September 30, 2023, and was 63 days or 55 days net of deferred revenues. During the third quarter, we began to invoice certain regulated waste and compliance services subscription-based customers in advance, which contributed to the higher reported DSO for September 30, 2023. DSO was recorded for September 30, 2022, was 63 days or 62 days net of deferred revenues. For September 30, 2023 DSO, net of deferred revenues was lower as compared to the same period in 2022, mainly driven by the improved timing of FID customer billing and collections.

As shown on Slide 10, at the end of the third quarter, we maintained our credit agreement defined debt leverage ratio below three times, achieving a ratio of 2.84 times. As Cindy noted, we recently completed three divestitures for a total of eight divestitures in 2023. In 2022, the Romania medical waste business and the Netherlands central recycling business collectively contributed less than 1% of revenues and had approximately breakeven adjusted EBITDA. On Slide 11, we have removed the divested revenues from our 2022 baseline. The joint venture in the UAE was accounted for as an equity investment and included in non-controlling interest. Collectively, these businesses were sold for a nominal amount of net proceeds. As noted on slide 11, we are providing our updated 2023 guidance, taking into consideration our expectations for the fourth quarter.

We have lowered our organic revenue growth rate range to 2% to 3% from 3% to 5%, mainly due to the impact of commodity index revenues. We have narrowed our adjusted earnings per share guidance range to $1.80 to $1.95 from $1.75 to $2.05 and this updated range reflects the impact of the self-insurance settlement in the third quarter and potential commodity volatility that I mentioned earlier. We have narrowed our capital expenditure guidance to $135 million to $145 million from $125 million to $145 million. This reflects our expectation on the timing of cash outlays associated with the McCarran incinerator project. We have modified our free cash flow range to $170 million to $190 million from $175 million to $205 million. This is mainly driven by our expectation that we will be at the high end of our capital expenditure guidance range, the self-insurance settlement and severance associated with our targeted workforce reduction mentioned by Cindy.

These three items could potentially result in an incremental cash outflow of approximately $10 million to $15 million in the fourth quarter, higher than we previously planned. Excluded from our free cash flow guidance as adjusted litigation payments, of which we paid approximately $13 million in the third quarter and expect to pay approximately $5 million to $12 million in the fourth quarter. I will now turn the call back to Cindy.

Cindy Miller: Thank you, Janet. One of Stericycle’s core values is that we embrace diversity and inclusion, aligning with this core value, I’m excited to share that earlier this week, we were recognized for the third consecutive year by Women in Trucking as one of the top companies for women to work for. This award highlights our focus on creating a rewarding and positive work environment for all of our team members. And as always, I’d like to thank our customers, team members, the communities we serve and our shareholders for their continued trust in having Stericycle protect what matters. Operator, please open the line for Q&A.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question will come from Sean Dodge of RBC Capital Markets. Your line is open.

Sean Dodge: Yes. Thanks. Good morning, and I’ll start by offering my congratulations on the successful ERP deployment. I know that’s been a big lift. So it’s got to feel really nice to have that done now.

Cindy Miller : Thanks Sean.

Sean Dodge: On the – you all shared the update there. It sounds like so far, so good, being now more than a full month into that, having used it – are we pretty much out of the woods now as far as figuring out if there are any glitches or bugs left or not? I guess, at what point can we declare all clear here? And then where do you think the dangers or risks still lie going forward?

Cindy Miller : Yes. Sean, thanks for that question, and thanks for the congratulations. I can tell you the – we are tremendously proud of the overall journey that our team members and the support folks have had. It was quite a learning for us, putting a company with no technology really onto a platform a couple of years ago. And the amount of lessons learned leading up to putting this business unit on which had far more complexities. And for it to have gone as well as it has and continues to, we’re really very, very happy about it. And I think the good news is, as Cory had said in his remarks, there isn’t customer disruption. Most of everything has gone off pretty seamlessly. And I think the testimony to that is, do we still have – are there major issues?

I think we’ve put those to bed. We know where they are. We’re still fixing a few things. But I think for us, we’re now almost morphing from worrying about where are the doses in the system to correcting the problems that we’ve identified and now even moving towards, all right, where are the next enhancements and any time you do that in the system, the sooner you can get to your enhancements, the things you forgot, the thing that would make something a little bit more intuitive, the suggestions back from the field. I think we’ve gotten to that point certainly much faster than any of us anticipated, which is really, really good news. So Janet, any other insights?

Janet Zelenka: I think, Cindy, you said it very well. We have actually off to build. And as a reminder, about 70% of the billing is subscription-based. So we have gotten those builds out actually at the start of the month and continue to build that through. If there’s anything we’re looking at, it’s being very thoughtful with a transactional billing that’s going down to make sure it’s accurate but don’t anticipate that to be a big issue. And to Cindy’s point, we are moving into where can we enhance the system for rather than where is it broken. We do have a few incidents left, as you would expect, the lower the volume than we expected to have at this point in time.

Cindy Miller: And I think, Sean, one last thing, just to wrap that up. Right now, everybody at least understands how to use it, but everybody hasn’t really developed their own we all developed a routine in the nuance of how we make it work faster or how we know to click through things. I think we’re developing that right now. And so there’s still some learning. There’s still some change management, not everybody has adopted it or has become as proficient as everybody else at the same time. But for the most part, I think major potential issues with customers, with revenue recognition and those types of things, I think those are well behind us.

Janet Zelenka: And I think to your point, as you mentioned, that we went live actually running the trucks at the beginning of September. The quarter was spent in getting ready the truck started rolling in the beginning of September. So we do have a good month and more under our belt a month in the quarter and more than that as we talk today.

Sean Dodge: Okay. Great. And then, Janet, on both the EPS and the free cash guidance for Q4, implies a bit of a step-up from Q3. Can you just walk us through what’s expected to drive that anything you have about visibility there? Is this kind of the benefits of the workforce reduction kind of improving productivity, anything else?

Janet Zelenka: Yes. So we have some real key items that will help us drive there. One is we’ve had that incentive comp, which underneath that is a stock comp acceleration that was due to retirement benefits I mentioned earlier. That basically ends in the fourth quarter. So that’s a few tens of uplift. We had that onetime self-insurance claim that will repeat and that will be an uplift if you’re looking quarter-to-quarter. We see fuel helping us a bit in the quarter as you see that it has been mitigated as the price and then we can see continued up and bad debt from quarter-to-quarter. Those are some of the key bubbles, I’m not even been talking about the continued to improve as we get more confident on the system and from the learning curve that Sandeep mentioned. So we see a good line of sight to that EPS and then the cash flow, similar sort of similar follow up too.

Sean Dodge: Okay. All right. Great. And then congratulations again. Thanks.

Janet Zelenka: Thanks, Sean. Appreciate it.

Operator: Thank you. One moment please for our next question. And our next question will come from Scott Schneeberger of Oppenheimer & Company.

Scott Schneeberger: Thanks very much. Good morning. I’d like to share my congratulations. I know how much the whole organization has worked hard in preparation for this, so great that you’ve finally flipped the switch, I’m curious, is there – you covered a lot of the updates very well. I believe you were running all on parallel systems throughout the process. Could you give us an update on how dependent you are still on parallel systems? And a follow-up to this getting onward and upward, just thinking about international and timeline we should consider now that you’re off and running in the U.S. Thanks.

Cindy Miller: Yes. Scott, what I’ll do is I’ll take that international portion of the question on two-fronts. And then in terms of the duplicative systems that we have, the legacy and the new one, I’ll let Janet handle that. In terms of International, a couple of things, we’ve now had 19 divestitures since 2019. And that’s done a few things, number one, certainly, from an overall portfolio, our ability to manage things that has certainly helped us. But the other thing it’s done, as you can imagine, is tying into the answer Janet is going to give you is we’ve got 19 less countries and places and geographies and business units that we have to figure out how to put on this new platform. So this has afforded us an opportunity not just to improve balance sheet, not just to improve oversight, not just to manage the business better, not just to use proceeds to pay down debt.

This has also afforded us the opportunity to shrink the footprint of what’s going to be required that’s going to have to continue to go on to this new platform. So I think – and then in terms of actual portfolio optimization, which is one of the key priorities. We still leave that on there because I did talk about 19 divestitures, but we’ve also had an acquisition. So if – and Scott, you’ve been on the journey with us since the beginning, we originally talked about portfolio divestitures. Then we morphed it to optimization figuring that at some point in time, we might get a stable enough balance sheet where we would have options to not just be focused on divestiture, but also become focused on potential tuck-in acquisitions. Now that we understand more about the business, where are our strengths, where do we have a great footprint, so I think we’re leaving it on there for both things, potentially divestiture, but then also from an acquisition perspective.